Email this article to a friend

The benefits of buying a company can be many and varied but it certainly helps get comfortable with a potential portfolio company if your money comes from people in the same sector.

The Ontario Teachers’ Pension Plan, the C$87.8bn (€59bn) in-house investment manager of the Canadian retirement scheme’s purchase of Acorn Care and Education from Phoenix Equity Partners, fits firmly into this bracket.

With 10 special needs schools and fostering services across seven counties, Acorn has grown quickly since its launch in 2005 under its experienced management team of Kevin McNeany, chairman and former founder of founder and executive chairman of UK-listed Nord Anglia Education, and Steve Page, a former chief executive of Oxleas NHS Trust and managing director of recovery hospital Priory Healthcare.

McNeany has sold his stake in Acorn through the secondary buyout with Page and the remaining executive management reinvesting for a minority stake.

Phoenix has made an estimated four-times return on its deal. James Thomas, a managing partner of Phoenix, said in a statement: “By investing substantial growth capital since 2005, and by working hard alongside Acorn’s excellent management team, we have together succeeded in establishing Acorn in its leading position.”

The Canadian state teachers’ pension fund’s private equity arm, Teachers’ Private Capital, has succeeded in making its first European buyout.

But the wider significance is what the investment might mean for its future limited partner commitments. The deal was struck at about £150m, and Teachers’ Private Capital in an interview with the Financial Times said it was aiming for direct deals between £125m and £400m so as to avoid clashing with its existing fund commitments to general partners, such as BC Partners and Phoenix, which generally look for bigger and smaller deals, respectively.

This division is sensible – if Teachers’ has recruited staff able to do buyouts in this area and has an angle, such as with Acorn, there is no reason why it cannot compete and achieve similar success to the best independent private equity firms.

Related

The risk comes from a captive buyout team, such as Teachers’, trying to keep talented staff and maintain the alignment of interests and discipline from regularly buying and selling companies for a profit.

There also remains a potential conflict of interest in buying portfolio companies from a fund where it also acts as a limited partner. Banks and insurers have faced similar issues to Teachers’, and others the Canadian pension scheme can automatically avoid, such as trying to invest to earn advisory and other fees.

The past year’s dearth of UK and European buyouts has partly been a response to the large number of non-traditional private equity investors, such as integrated finance operations of banks or financial entrepreneurs that had made up half the market at its peak, disappearing.

Teachers’ return to the fray with some signs of life in debt markets and undrawn capital at buyout funds means the near-75% drop in activity to £5.5bn in the UK last year is likely to be a low point.